Business context and reporting period
Community Healthcare Trust Incorporated (CHCT) is a healthcare REIT that owns and leases properties to healthcare providers. This unaudited Form 10-Q covers the quarter ended March 31, 2019; comparisons are with the quarter ended March 31, 2018 unless stated otherwise. At quarter-end, CHCT held 105 properties across 29 states, representing approximately 2.3 million square feet and $478.4 million of gross real estate investments.
Key financial results
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $13.441 million | $11.429 million |
| Rental income | $12.898 million | $11.075 million |
| Net income | $1.450 million | $1.872 million |
| Basic and diluted EPS | $0.06 | $0.09 |
| FFO / diluted FFO per share | $6.732 million / $0.37 | $6.783 million / $0.38 |
| Operating cash flow | $7.330 million | $5.948 million |
| Cash and restricted cash at quarter-end | $4.034 million | $2.285 million at March 31, 2018 |
| Debt, net | $179.117 million | $147.766 million at December 31, 2018 |
| Total assets | $456.730 million | $426.570 million at December 31, 2018 |
Revenue increased 17.6%, primarily from real estate acquisitions. Expenses rose 19.3% to $10.106 million; property operating expense increased 30.1%, general and administrative expense 49.6%, and depreciation and amortization 6.7%. Interest expense increased 62.0% to $2.054 million. Net income fell 22.5%; FFO was nearly flat and diluted FFO per share declined from $0.38 to $0.37. The filing does not present a standalone margin measure.
Operating activities provided $7.330 million; investing used $33.334 million, mainly for acquisitions; financing provided $27.646 million. CHCT paid $7.628 million in dividends during the quarter. Debt to total book capitalization was approximately 39.9%; management stated the company was within its credit-facility covenants. The $175 million of term loans was fully drawn and hedged at a weighted-average fixed rate of approximately 4.569%. The amended facility also had a $150 million revolving capacity available at March 31.
Material changes and notable items
- Q1 acquisitions: two properties totaling approximately 83,000 square feet were acquired for $32.7 million; they were 100% leased in aggregate, with lease expirations in 2029.
- Credit facility amendment: a new $75 million term loan was added, the revolver maturity was extended to March 2023, pricing was improved, and certain covenants were adjusted. Proceeds repaid the revolver balance; approximately $1.3 million of fees and expenses were incurred.
- Equity issuance: CHCT sold 143,600 shares through its ATM program at an average gross price of $33.57, receiving approximately $4.7 million net. Approximately $84.8 million remained available under the program at quarter-end.
- Leasing: portfolio occupancy was approximately 88.9%. During the quarter, approximately 42,000 square feet of leases expired or terminated and approximately 50,000 square feet were leased or renewed.
- Accounting: CHCT adopted lease accounting Topic 842 on January 1, 2019, recording a roughly $0.1 million right-of-use asset and operating lease liability for one ground lease. The standard also led to tenant reimbursements being included in rental income; $1.4 million of Q1 2018 tenant reimbursements was reclassified for comparison.
- Hedges: cash-flow hedge fair-value changes produced a $1.275 million other comprehensive loss in Q1 2019, versus $0.974 million of other comprehensive income in Q1 2018.
Outlook, risks and contingencies
No formal earnings guidance is provided. Management said available liquidity sources were adequate for expected needs, while noting funds may not be available on acceptable terms or in sufficient amounts. The board declared a $0.41-per-share quarterly dividend payable May 31, 2019, equivalent to an annualized $1.64 per share.
After quarter-end, CHCT acquired an approximately 81,000-square-foot, fully leased property for $27.0 million, funded with $23.0 million from the revolver and the balance from cash. The company also reported two properties under definitive agreements for approximately $4.9 million and four properties expected after completion and occupancy for approximately $76.0 million; timing and completion are not assured.
Highlands Hospital had payment issues with its former operator. A transition agreement provided monthly payments approximating prior obligations, but CHCT did not recognize approximately $0.3 million of January revenue and incurred more than $0.1 million in professional fees. Transfer of licenses and commencement of the new lease were anticipated in the second half of 2019, but the filing cautions the transaction may not close. Management anticipated collecting amounts due and no material long-term effect on cash flow or net income.
Other risks include acquisition execution and funding, refinancing and interest-rate exposure, healthcare-sector developments, tenant and borrower credit, and continued REIT qualification. CHCT reported $24.1 million of notes receivable, principally a $23 million loan bearing 9% interest and maturing in 2031; the identified borrowers are variable-interest entities, and exposure is limited to the outstanding notes. The company reported no material pending or threatened litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Highlands’ license transfer and new lease proceed on the expected timetable, and whether outstanding amounts are collected.
- Acquisition pipeline closing dates, returns, occupancy, and the financing required to complete planned investments.
- Rent collections and portfolio occupancy, including tenant credit and lease rollover exposure.
- Debt covenant headroom, leverage relative to the company’s stated 40% financing-policy limit, and sensitivity to rates and refinancing needs.
- Cash flow and FFO available to support dividends, compared with the $0.41 quarterly dividend and future investment requirements.
- Performance and collectability of the $23 million borrower loan and other notes receivable.